Keep your eyes open for black swans in the coming year

Kathleen Brooks
1 Israel takes out Iranian nuclear capacity, triggering a popular uprising, which causes the government of Mahmoud Ahmadinejad to be overthrown. Western businesses begin to look more positively on the less volatile Middle Eastern region, especially oil companies and other utilities providers which can now operate in a more stable environment. This is positive for oil companies and risky assets.

2 Over-zealous central banks withdraw quantitative easing too soon. This causes further contraction in the credit markets and a double-dip recession. In this scenario there would be a massive contraction in risk. Gold would probably be the investment of choice with government bonds, the dollar, the yen and the Swiss franc gaining from safe-haven flows.

3 Quantitative easing is left in place for too long, sparking an inflation crisis in the UK. The Bank of England rapidly raises interest rates. Financial markets hate inflation, so bonds would tumble and equities would be hurt as higher rates choke economic growth. Sterling could be one winner in this scenario, as it would be supported by high interest rates.

4 Gordon Brown calls an early election in March and the Conservatives implode, allowing Labour to take control of a hung parliament. With electioneering no longer so important, Labour announces an Irish-style austerity budget to tackle the fiscal crisis. Bonds rise as investors expect the number of gilts issued to fall in the coming years. Sterling also receives a boost. The FTSE, however, comes under pressure as investors worry about the impact of higher taxes and lower public spending. There is a generally anti-business feel from government, which erodes trust in the City. Perhaps leading to…

5 A large multi-national bank decides to leave the City in disgust at the 50 per cent levy on bankers’ bonuses. This precipitates a wave of international finance houses to follow suit and abandon the UK for more tax-hospitable climes. If the UK is perceived as a bad place to do business, future IPOs could move to other financial centres. This could also dent UK economic growth due to the importance of the financial sector to the economy.

6 A large-scale retail banking crisis could de-rail an economic recovery. A global retail-banking crisis would have a big major effect on Anglo-Saxon economies that rely on the smooth flow of credit. This is bad news for financial markets in the UK, US and Australia, New Zealand and South Africa.

7 Now that most of the Troubled Asset Relief Programme (Tarp) money has been paid back, some sort of Glass-Steagall Act is reintroduced in the US, separating retail and investment banking. Currently, big figures such as John McCain are lobbying for such a law. Such a fundamental change would impact jobs in the US financial sector, would limit revenues available to banks and cause them an administration headache.

8 If BA goes bust in 2010 its pension fund liabilities, currently totalling more than £3bn, would overwhelm the Pension Protection Fund and probably require a government-funded bailout, and BA workers could see their benefits cut. This would be very bad news for equities, as investors would probably sell off other corporations with pension fund deficits.